Welcome to the Dexcom 2013 first quarter earnings conference call. My name is John, and I'll be your Operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Terry Gregg. Mr. Gregg, you may begin.
Thank you, Operator, and thanks for joining us for this first quarter 2013 conference call. I'm going to ask Steve Pacelli to read our safe harbor statement. Steve?
Thanks, Terry. Some of the statements that we will make in today's call may constitute forward-looking statements. These statements reflect management's expectations about future events, operating plans, and performance and speak only as of the date thereof. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under the section Risk Factors and elsewhere in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other reports filed with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason. Additionally, we will discuss certain financial information that has not been prepared in accordance with GAAP with respect to our cash operating loss.
This Non-GAAP information is provided to enhance your overall understanding of our current financial performance. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Terry?
Thank you, Steve. Joining me today are Kevin Sayer, our President and Chief Operating Officer, Jess Roper, our Chief Financial Officer, and Steve Pacelli, who you've just heard from, our Executive Vice President of Strategy and Corporate Development. As we just held our Q4 2012 earnings call in late February, today's call will be largely a financial update, with Kevin reviewing our first quarter 2013 financial results, providing a brief operations update. I will then follow with some concluding thoughts. Kevin?
Thank you, Terry. I will start with the financial update. Dexcom generated $27.8 million in product revenue for the first quarter of 2013 compared to $18.6 million for the same quarter in 2012, a $9.2 million or 49% increase. Sequentially, product revenue for Q1 of 2013 decreased 12% from the prior quarter, which is consistent with the 11% decrease we experienced from Q4 2011 to Q1 2012. This seasonality is not unexpected, as annual insurance deductibles reset and flexible spending accounts are largely unfunded in Q1, requiring patients to spend more out-of-pocket dollars to obtain our products.
Total revenue for the first quarter of 2013 was $29.6 million compared to $20.1 million during the same quarter in 2012. Our product gross profit totaled $15.4 million, generating a product gross margin of 55% for Q1 2013 compared to product gross profit of $9 million and a product gross margin of 49% for the same quarter in the prior year. As a reminder, product gross margin continues to be affected by a number of factors related to our G4 PLATINUM launch, including the impact of our $399 in-warranty upgrade program, which expired at the end of January, continued manufacturing scale-up activities for G4 PLATINUM and the continued support of our Seven Plus sensor manufacturing operations.
Some final thoughts on our product revenues and our gross profits during Q1. Our split between consumable and durable revenues was again slightly more heavily weighted to durables in Q1, due primarily to existing patients upgrading to the G4 PLATINUM, with approximately 30% of our product revenue generated by sales of G4 PLATINUM hardware and approximately 70% generated by sales of both Seven Plus and G4 PLATINUM sensors. ASP for sensors has increased slightly to a range of approximately $65-$70 per sensor, and the ASP for our hardware continued at approximately $800-$850 per starter kit. Our international business performance remained consistent in Q1 and continues to represent between 5%-10% of product revenue, but remains somewhat overshadowed by our strong domestic growth.
Research and development expense totaled $9.3 million for Q1 of 2013, which was flat compared to $9.4 million in Q1 of 2012. Sequentially, R&D expense was up 7% as a result of increased spending on the development of our mobile platforms. We continue to expect that R&D expense for the full year will be relatively flat versus 2012. However, we will always consider adjusting our R&D spend to take advantage of near-term opportunities such as advanced integrated pump CGM systems, mobile and cloud-based data platforms, system performance improvements, all of the elements of our Gen 5 system, and continued research on our G6 sensor platform.
Selling, general, and administrative expense totaled $18.1 million in Q1 of 2013 compared to $15.4 million during the same quarter in 2012. The increase primarily related to sales, administrative, and IT costs to support revenue growth. Of the $2.7 million increase, $400,000 of it is centered in non-cash share-based compensation. The remaining increase was primarily related to investments on the sales and marketing side of the business. In particular, the reorganization of our U.S. field team and expanded headcount in our sales organization. Our net loss for the first quarter of 2013 totaled $11.1 million and included $7.2 million in non-cash expenses centered in share-based compensation, depreciation, and amortization.
Absent these non-cash charges, our operating loss for Q1 2013 would have been $3.7 million. Compare this cash operating loss of $3.7 million to a cash operating loss of $9.7 million in Q1 2012. We are pleased with our progress in driving the company to profitability. Let me say it another way. Of the $9.2 million increase in sales from Q1 2012 to Q1 2013, $6 million dropped to the bottom line on a cash basis. Needless to say, we're excited about the long-term profitability profile we believe we can achieve here at Dexcom. The business model is maturing as we planned. Our net loss per share for the quarter was $0.16.
With respect to our balance sheet, we ended the first quarter with $45.3 million in cash and marketable securities, down only $3.4 million from the end of 2012. Finally, we will reiterate our product revenue guidance for 2013 of $120-$130 million. Now to give you a business update. Turning to our business, we continue to be extremely pleased with the commercial launch of the G4 PLATINUM system. With its significantly improved accuracy, convenience, and reliability, we believe that the G4 PLATINUM fulfills the potential of CGM as the first and most essential tool in the treatment of diabetes. Patient testimonials and blog postings regarding the performance of the system have been nothing short of remarkable. With G4 PLATINUM, we believe we have finally achieved the promise of CGM.
As we mentioned during our earnings call late in late February, during the first quarter, we filed a PMA supplement with the Food and Drug Administration seeking a pediatric indication for the G4 PLATINUM. We have also received CE mark approval for pediatric patients and have begun marketing to pediatric patients in Europe. With respect to our U.S. pediatric submission, similar to our previous filings, we continue to have a regular open dialogue with the FDA. We remain excited about the prospects of a pediatric indication, as it not only significantly expands the number of endocrinologists we can call on in the United States. We expect to be able to recommend our technology to patients as young as two years old, which will be a first for CGM. Many of our future generation products, particularly our mobile and cloud-based products, will be very applicable to this market segment.
In particular, we continue to make considerable progress on the Dexcom Share system, a remote monitoring system developed to address the unique challenges faced by caregivers in assisting people with Type 1 diabetes. As a reminder, the Dexcom Share system is a docking station for the G4 PLATINUM receiver, enabling wireless transmission and glucose information, such as the patient's trend graph and alert notifications, from the G4 PLATINUM to designated recipients, allowing the recipient to view the patient's data on a smartphone. For example, a parent could receive their child's glucose information during the nighttime while they sleep in another room, or during the school day while the parent is at work. It will also have non-pediatric applications, such as for a spouse while at work or when traveling. We expect to file the Dexcom Share system with the FDA in the third quarter this year.
On the international front, we are pleased to report that we have received approval from Health Canada to begin marketing the G4 system in Canada. Our initial approval is for adults only. However, we expect to file a supplement seeking pediatric approval later this quarter. Our distributor in Canada expects to commence a limited launch at the beginning of Q three, with a full launch commencing before the end of Q three. We also continue to explore opportunities in China, Japan, and other Asian geographies during the first quarter, and we had a number of productive meetings with potential business partners in both China and Japan. We are currently evaluating potential partners and better educating ourselves on the most prudent regulatory path into these countries.
By the end of the year, we expect to be commercial in up to 30 countries worldwide, compared to approximately 20 at the end of 2012. We continue development on the Gen 5 system, working on an improved applicator combined with a mobile phone interface. The FDA has been very cooperative with us regarding our efforts to develop a mobile CGM platform. The path is becoming more clear with each and every step we take. For example, the Share product and its data platform represents a very well thought out and deliberate approach for our first connected product offering. Shifting to our integration partnerships, we are pleased to report that Animas has filed a PMA with the FDA seeking approval of the Animas Vibe system in the U.S..
Animas continues to commercialize the Animas Vibe system in Europe and has reported strong success where the product is launched. We continue to work diligently with Tandem Diabetes Care to incorporate the G4 PLATINUM into a next generation version of Tandem's t:slim, and we expect to be in a position to assist Tandem in filing a PMA with the Food and Drug Administration before the end of this year. Finally, on the Edwards front, to quote Edwards CEO Michael A. Mussallem. We remain enthusiastic about the significant opportunity represented by our GlucoClear system, end quote. As we mentioned during our Q4 earnings call, we don't expect significant sales for GlucoClear this year. However, Edwards' management expects 2013 to be a pivotal year as Edwards completes additional studies in Europe and gains greater clarity on the path towards U.S. approval.
We remain enthusiastic about the significant opportunity represented by this technology and look forward to supporting Edwards as they bring our best-in-class sensor technology to the critical care setting. I would now like to turn the call over to Terry for some concluding remarks. Terry?
Thanks, Kevin. As I reflect upon the six months after our launch of the G4 PLATINUM, we have learned a number of important things. Accuracy is everything. The data demonstrates that the sensor is 24% more accurate in the 40-400 range, and 30% more accurate below 70 milligrams per deciliter, which is especially important to detect hypoglycemia. While we believe accuracy is essential, we have also learned that the overall patient experience is what truly matters. We believe that our best-in-class accuracy and reliability empowers people to take control of their diabetes. G4 PLATINUM has set a new standard by which all future sensor technologies will be measured.
In fact, just a few weeks ago, at a National Institutes of Health-sponsored meeting on the development of an artificial pancreas, investigators from Boston University and Massachusetts General Hospital reported the results of a 24-patient comparative study between Medtronic's Enlite sensor, the Abbott FreeStyle Navigator sensor, and the Dexcom G4 PLATINUM. The researchers reported an MARD, or mean absolute relative difference, of 17.9% for the Enlite, a 12.5% MARD for the FreeStyle Navigator, and a 10.8% MARD for the G4 PLATINUM. A 10.8% MARD for G4. The researchers are currently completing a small outpatient study of an artificial pancreas system using the G4 PLATINUM, and have received IDE approval for a larger follow-up study to be conducted at two New England diabetes camps this summer. We are certainly not stopping here.
Prior to the G4 PLATINUM launch, we went several years without a new product introduction. That will not happen again. As Kevin highlighted, just this year we have filed for a pediatric indication. We supported Animas in filing the Animas Vibe system. We have committed to filing the Dexcom Share system in Q3 and assisting Tandem in filing a sensor-pump combination system before year-end. I'm also pleased to report that we have completed development of a next-generation algorithm for the G4 PLATINUM to further improve our sensor performance, and we expect to file a PMA supplement for the new algorithm late this year or early next. We have the potential for up to five new product introductions in the next 12-18 months. All of these introductions are incremental steps towards our ultimate goal of replacing finger sticks.
We entered 2013 with our principal message to the diabetes community of CGM first, targeted to both patients and professionals. Simply stated, CGM should be the first tool you use when treating diabetes. CGM is the best tool to determine a patient's glycemic variability, and the best tool to understand the action of insulin and other anti-diabetes agents in improving glucose control independent of how these agents are delivered. Our field team has been very effective in delivering that message. While largely anecdotal, we believe a number of physicians are beginning to embrace the G4 PLATINUM as a frontline tool, in large part because of its convenience and simplicity, in addition to its exquisite accuracy. Our second goal this year is to improve our outreach about the benefits of the G4 PLATINUM.
A recent survey of approximately 300 patients indicated that for about 70% of the Seven Plus respondents, their physician was the most influential driver in choosing CGM. Yet only 50% of the G4 PLATINUM respondents cited their physician as a driving factor. This supports our belief that we are experiencing an increase in patient-to-patient communication as a key factor in the uptick of CGM adoption. Finally, a brief comment on Type 2 patients and CGM use. When I mentioned glycemic variability earlier, I was not restricting my comments to only Type 1 patients. Excessive glycemic variability occurs in both Type 1 and Type 2 patients. Lately, excessive glycemic variability is getting a lot of negative recognition in the literature, with reduction of glycemic variability cited as potentially more impactful than reduction of A1C to improve diabetes management.
Several studies have linked excessive glycemic variability to adverse health outcomes, including diminished cognitive function, retinopathy, and increased cardiovascular disease. While we know that chronic elevated glucose levels contribute to the adverse clinical outcomes associated with diabetes, including both micro and macrovascular conditions. Acute daily glycemic variability is now being identified as causing oxidative stress, believed to be the underlying cause of these long-term complications. Increase in the number of private payers covering insulin-using Type 2 patients. In just the last year, 12 payers with approximately 20 million covered lives have amended their policies to provide coverage for Type 2 patients, and this is in addition to both Cigna and Anthem, who have had policy in place. CGM is the only tool to determine the level of glycemic variability in order to take corrective action to improve glucose control. We believe our future is very bright.
Thank you, and we will now open it up for questions.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. Our first question comes from Thomas Gunderson from Piper Jaffray. Please go ahead.
Hi, good afternoon, everybody.
Hey, Tom.
just a quick clarification on the last part, Terry. I think you said 20 million covered lives for the 12 payers in T2. That's in addition to whatever covered lives you have for Cigna or Aetna, or including?
No, that's in addition to. That's just in the last 12 months, Tom.
Got it.
We've seen that improved. Obviously, we knew that Cigna, Anthem had established coverage, but this is new. This is primarily the responsibility of our managed care group, and they've done an outstanding job of improving that policy coverage.
I know these are difficult, if not impossible to count, but do you wanna venture a guess as to what percentage of your sales is going to Type 2?
It would, at this point, still, in my opinion, be de minimis.
One of you could talk about how the change in the sales field force is going, the reorg and the expanded headcount, the clinical associates being shifted over to territory people. Give us a little more color on that if you could.
Yeah, Tom, this is Kevin. I'll take that. With the exception of just a couple slots, we've built the entire organization, the additional 20 territories that we had outlined. Our sales reps who have converted over are all doing extremely well. The talent available to us with our business and our product has been outstanding. We've added some absolutely fabulous people who have hit the ground running. Most all of our territories are performing the way we expected them to. We're off to the races. With respect to the clinical aspect, our patient care team is what we had put together to, in essence, to replace those clinical specialists in the field.
We've expanded that from 4-12 people who work the phones continually and have a very, very structured program with respect to contacting our new patients and sometimes taking educational calls from those who've been patients for a longer period of time versus our normal tech services group, which responds to, you know, product issues. I can tell you that group is fully staffed and doing very well also. Everything's clicking the way we wanted it to.
Got it. My last question, I'll let some others in, is ADA a ways off in June, and yet we won't have one of these calls until after that. Are there any highlights or things we should look for at ADA that would be interesting to Dexcom investors?
It's an interesting question, Tom. I would just say you know, I think the influence of the artificial pancreas group certainly will be on the podium talking about their experiences. As you know, in that environment, everything is kind of geared towards the artificial pancreas arena from the scientific community. That for us will probably be the highlight, especially given you know, we're in 22 out of approximately 25 artificial pancreas programs around the world. That would be the highlight for us. Outside of that, I'm not aware of anything in particular that you should be looking for.
Got it. Thank you, guys.
Our next question comes from Ben Andrew from William Blair. Please go ahead.
Good afternoon. Can you hear me?
Hey, Ben.
Hey, guys. A few questions for me, please. First, Terry, talk a little bit about the peds rollout and, you know, I think it was 15% or 20% of your installed base is peds. What should that be, say, in a year from now?
30%.
Okay. What does it take to get there? Is it just getting in front of the endos and they already know the product, they just need detail? Is it take staffing? Does it, you know, what sort of movements on the part of Dexcom does that require?
Well, first of all, to get an approval. Second, beyond that, just get in front of them. Luckily, that it is a rare situation in which there is a solo practitioner with a pediatric endocrinology practice. They're generally grouped with young adults and adults or in at least close proximity. That won't require adding new bodies to our group beyond what we've done in the reorg. We're not gonna be looking at substantial windshield time by the sales group. It's just the ability to go call on them on a routine basis and talk about the benefits of the G4 PLATINUM. Now many of them know it already, but like anything, I mean, the more shots on goal, the more pucks go in kind of attitude. And so this will be the first time that we've been able to call on that sector.
Terry, any information content yet that in the six months into the launch about utilization trends or patient retention from G4 other than anecdotal commentary?
No, not really. I think we need at least a quarter or two to truly understand. We have stated earlier, and it has been truly anecdotal, the feeling it looks like they're using it, they being patients, using the product more frequently. And I can't attribute directly as that more patients using it without taking a holiday. We certainly reading the blogs, and that is the best metric we have right now. There's great utilization from that standpoint, greater confidence in the product. But beyond that, it's hard to come up with qualitative or quantitative metrics on that, Ben.
Okay. Then finally, can you talk a little bit about the next generation algorithm for the G4? What does that bring you in the order of magnitude improvement in MARD or other features? Thank you.
Yeah. I can tell you that overall it's gonna improve the MARD by about two points from the 40 to 400 and day one through day seven. That's important because if you look at what the folks at Boston University and Mass General, they're at 10.8. We certainly think that we can get, you know. What we published with the FDA was 13% MARD. If we could get down into that overall range of around 11, we would be sub 10 at some point during the week because as you know, Dexcom sensors get better over time. Day four is better than day one, and day seven is usually as good as day four, if not better. We're excited about that opportunity to improve the outcome of that.
Thank you.
Our next question comes from Bill Plovanic from Canaccord. Please go ahead.
Hey, great, thanks. Good evening, and congratulations on a solid quarter.
Thanks, Bill.
I'd like to leverage off Ben's question there. As you look at G4, you know, you've talked about kind of new product launches. We talked about PED. You know, when would we expect this new algorithm to come? I think I missed that in the prepared remarks.
We hope to file it certainly, like fourth quarter or early in 2014, and it would come sometime after that. Then as Terry said earlier, that is really an accuracy enhancement for us. We don't have any real launch plans to share with you on that, but that will come out and be approved sometime next year.
Is that what the Harvard, the study, the 24-patient study that you referenced, Terry? Is that what they used?
No. They're just using G4 PLATINUM. We originally, you know, we developed part of this algorithm as part of an AP project. Like everything else we do, we expanded that. If it's good enough for that project and we get comfortable with it's certainly something we want to incorporate for everybody. That's how it kind of evolved over time, and we got excited.
Okay. You know, you've gone through the G4 upgrade. How many of the customers are left to upgrade, and did you have a lot of the 399s this quarter?
We had a good number. It wasn't unexpectedly high or low. It was a piece of it. It had a little bit of a negative impact on margins, but not a whole lot. What we've seen, Bill, is quite a few have upgraded, but we've also seen a lot of them are waiting until they're out of warranty because they want insurance to cover that purchase of the new system. While the $399 upgrade is appealing to a number of people, there are a lot of people who manage their diabetes dollars very closely, and they're waiting until they can get the upgrade.
What we've also noticed with those customers on the Seven Plus side is they are bleeding through every sensor they have in their closet and everything they have on their shelf, and their reorder numbers are actually lower than what we've experienced historically because they don't want to upgrade with any Seven Plus sensor sitting on the shelf. What we're seeing is a rapid conversion in our sales numbers to Gen 4 sensors, probably faster than we've converted on the hardware side as people are using up the stock that they have.
I've got a ton of questions, but I'll ask one more and let it slide. As you look at gross margins, you know, it's do you still think the peak on the disposable is 70%-75% by the end of this year? And then where are the controller receiver, you know, transmitter receiver margins today, and where do you think those can go? That's my question. Thanks.
We're never gonna have fabulous electronic type margins on the transmitter and receiver. We don't build enough of them at this point in time. We've had a lot of discussions with some of the cell phone manufacturers, and one of them told us they design a SKU, they build 55 million of them, and they shut down the line. They never build it again. We can't quite do that and get those kinds of efficiencies. We're very convinced that we can get our Gen 4 sensor margins up in the 70%-75% range, and we can even go better than that as volumes permit us over time. The hardware margins will be what they are. They're less than those. They won't ever get to 75%.
As we think about them, always kind of float around maybe a 50% range?
Yeah, that's fair.
Thank you.
Our next question comes from Jason Bedford from Raymond James. Please go ahead.
Good afternoon. Thanks for taking the questions. Any way you could talk about growth in shipments to new patients in the quarter?
You know, the new patient pattern's consistent with what we had during most of Q4. We do have upgrades. We've always had upgrades, and they've always been a reasonable part of our sales, but we have a lot of new patients coming on as well. We really don't have any numbers to share today. It's been very strong.
Right. In terms of the sales force reorg there, have the reps either been able to go deeper into existing accounts? Are you finding the reps being able to open up new accounts? I guess it's a way of asking the installed base.
Yeah, I'll take it.
Sure.
Yeah, I'll take it first, and then Terry's been out in the field also. What I've seen in the times I've had is our guys are going a lot deeper into a lot of accounts where they've been before because of the performance and the acceptance of this product by the patients that a lot of our longtime physicians are seeing. As they prescribe G4, the reaction they're getting is, "Oh my gosh, this thing is wonderful." They're prescribing a lot more. We're getting broader coverage as well.
Mm-hmm.
My, you know, my observation, again, anecdotally, I don't have numbers sitting here, is we're going a lot deeper with our existing physician base. Terry, you wanna add to that?
Yeah. Certainly, you know, with each year we target a particular message. As I indicated in my prepared remarks, CGM first is the message of 2013, and then outreach patient-patient communication. Within the CGM first, we are beginning to see traction. I mentioned it was anecdotal as we get information back from the field force. Certainly, they're spending much more time in each office than they historically have because the physicians are willing to give them more patients. Historically, it has always been much of a, unfortunately, a pump-centric type of environment in which they've had to operate, and we're moving the needle on that. We haven't moved it dramatically, but we are moving the needle. As a result of that, they are spending more time.
As Kevin said, that means that they're going deeper into each of those accounts. Again, in many of these accounts, there are multiple endocrinologists. It would be sufficient to say that not every single endocrinologist in a particular group practice would necessarily be prescribing any technology for that matter, let alone CGM. They are broadening even within a group practice of endocrinology to call on more physicians. Of course, then in relationships with our partners, we oftentimes, they call on a, in some cases, high insulin prescribing physicians who are not endocrinologists. You could certainly think that they were diabetologists, but we're beginning to see scripts come in from those as well.
That's a little hard to make a judgment how much is coming in from patient to patient or how much is coming in from a referral from either a Tandem or Animas or even Roche partner. That's helpful. Just last one for me, and I'll jump back in queue. Just to clarify the comment on utilization, is it fair to assume that it's stable? It's not going down or up, at least from on the G4? It's largely stable from what you've seen?
You know, at the very least, it is stable.
Okay. Thank you.
Our next question comes from Mimi Pham from ABR Healthco. Please go ahead.
Hi, good afternoon. Just, I guess a different way of asking prior question. Last quarter you said 60%-65% of your starter kit sales were to new patients. For this quarter, was it the same or higher?
You know what? I don't have that number with me. Patterns are pretty consistent, so I'd say it's probably close to the same. Mimi, we don't have that number sitting here.
For reimbursement for Type Two CGM. You know, with Type Ones, you obviously had the help from the JDRF. Is there a society or the ADA or any kind of other, you know, independent group that could help drive CGM reimbursement for Type Twos that your managed care group could get help from?
Well, no, I mean, we look to the ADA from that standpoint because remember, ADA is not only Type One in terms of their care commitment and cure mentality. In fact, they're, as a professional organization, all about the inclusive of both Type One and Type Two, where JDRF historically has been more towards the Type One. A lot of that has come from that organization. You have to understand, here's an interesting dynamic. I've stated this number before, but I'll state it again. Every day in the United States, 10,000 Americans turn age 65. You can say, well, you know, 65 is the new 55. What does that mean? Well, it means that we've got a lot more patients that are living longer and therefore developing Type Two diabetes.
As a result of that is something that ADA recognizes and has to embrace. It used to be that if you got to age 65 and you had Type 2 diabetes or even Type 1, you were lucky, and you certainly would have all of the challenges. I don't think that's the situation whatsoever anymore. It is something that they recognize that there's got to be intervention, and so they're helping drive that. I think if you now look at some of the things I talked about, glycemic variability. The amount of information that is being published in the literature about the role of excessive hyperglycemia in particular, that is impacting and creating some of these economic costs that the payer system is looking to ways in which to reduce that.
They've made all of the connect-the-dots assessments from that standpoint. I don't think we need a particular driver. I think more than anything, we need more peer review, independent type studies, and those are ongoing, and they will be published over time, and we'll be able to track them.
If we see Vibe approved in September or October timeframe, would there be any reason they would delay that rollout until next year? Just wanna clarify if, you know, with the filing now in, if a fourth quarter approval could mean a fourth quarter launch for Vibe.
It could, Mimi. Again, it's this is a decision that needs to be made by Animas. You know, just like we've commented in the past, you know, where we would potentially choose not to launch a product in the fourth quarter with a fourth quarter approval. Fourth quarter for Animas or for any of the pump companies, just like Dexcom, is the biggest quarter. I would guess if that approval came, you know, late third quarter or very, very early fourth quarter, they would probably launch it. To be honest, if it comes in the middle or latter half of the fourth quarter, my guess is they would not wanna pull their people out of the field, not wanna disrupt their selling efforts in Q4, and would probably defer to Q1 to launch it.
Our next question comes from Suraj Kalia from Northland Securities. Please go ahead.
Hi, guys. Congrats on a nice quarter.
Thanks, Suraj.
Thank you.
Terry, let me just ask some macro-level questions. A lot of company specific have been asked. Hopefully, you can shed some light here. Where do you all see your current CGM share in the U.S.?
I don't have an answer. You know, part of the problem here is, we don't publish our numbers. The other company doesn't publish their numbers. If we look at independent surveys, you know, if you look at dQ&A as an example from Close Concerns, has some 65% share in the U.S. I don't believe that for a second. I think of the responders to that particular survey, yes, they're what we call super users. Yes, we probably have that kinda share, but that's not the broader group. I think there's another bank that has published data based on a survey, and again, you know, puts us a little over 50% share. Again, I really don't.
It's a tough question, and our people see that, and I always caution them, you know, put your filters on because surveys are like anything else. It depends upon the body of the responders. Somewhere in that neck of the woods.
Yeah. This is Kevin. It's certainly between 40 and 60.
Fair enough.
That's about as close as we can get it.
Terry, the last one, I guess, I know this might be a little unfair question, but any thoughts on Medtronic's Precise Sense, you know, the dual sensing CGM that they were developing? Are you all hearing about it in the marketplace? Is it dead? Is it moribund? Is it still? Do you all see it on the competitive landscape? Any thoughts would be great.
Yeah. I don't really know a lot about it. I certainly don't think it's dead. I think that they presented some data about their long-term intent with it to use that as part of a redundancy for an artificial pancreas. I don't know where it's at developmentally. Outside of that, they were at the NIH meeting as well. We'll see. But don't know where they're at with that.
Fair enough. Thanks for taking my questions, guys.
Thanks.
Our next question comes from Bill Plovanic from Canaccord. Please go ahead.
Great. Thanks. A couple of follow-ups here. One was on Tom's question earlier, just on distribution. You've added 20. Kinda where do you stand now in terms of your reps? And then where do you plan to be by year-end?
We're done adding for the year. When we had the first quarter call, we said we were gonna go from 48 to 68 territories, and 68 is where we're gonna stop through the end of the year, barring some incredible growth spurt. But that's our plan as we sit here right now. That's where we are today, and that's where we'll stand.
Okay. You know, as you've been scaling up the manufacturing on the G4, you know, are you able to make it? Are you running into any problems? Just in general, how is that going?
Bill, it's going fabulously. Our manufacturing team has just done an incredible job with this launch. You heard Terry laughing. My favorite email to send him every week is my yield report. It is. These guys are doing a great job with sensor yields. It's been super.
Perfect. On the, you know, 10-day label was something that got bandied about a while ago. I was just wondering if that's something that could still be out there with a 10-day label or shutoff, or what do you think about that these days?
It is still out there. I can tell you in many of the studies that we do, particularly the ones we do internally, we're running them all now 10 or 14 days, even if we just take the data and cut it off at 7. We're running them longer so we can get a sense of how the sensor will perform from a physiology perspective within our patients and when that cutoff point would be. I think over time, and as we've discussed this as a team with respect to shutoff, the way we would plan on doing that would be have the algorithm shut the sensor off based on the signal from the electrode on the sensor. When we can see that it's not up to standard, we would have it shut off that way versus having a fixed shutoff at a point in time.
That's what we think is the best ultimate long-term solution, and we will look at that. Probably not as part of the current Gen 4 system and not in the next algorithm that we'll file. We'll take a look at it after that.
Maybe in G5 is what you're saying?
G5 or G6. We'll see.
That flows to the next question. Timeline on the G5?
You know, the FDA has been working with us very diligently to define how we get to a mobile platform and identifying all the risks and all the things we have to do to mitigate those risks. This is very much an ongoing process. We've heard from the agency, in a number of fronts that they're very comfortable with the device making a jump straight to a phone without something in between or without a medical device around it, without all the mitigating factors. We're working with them to better understand it. You know, Bill, that's the beauty of the Share system. We're gonna have a practice run that is not gonna be lights out, all of our patients turning it on at exactly the same time, but we'll have the server structure built. We'll learn how to receive the data.
We'll learn how to display the data back on the phone. The receiver is still the primary medical device, so with respect to an approval path, that's something that the FDA can comprehend and that we've made them comfortable with. We're excited for our first foray there, and we'll see how it goes. With respect to the applicator and the other elements of Gen 5, we have made the decision, we're gonna keep manufacturing the same sensor when we go to the Gen 5 platform. We don't need to change the sensor at all. With respect to the other hardware elements, we'll pick the right time when we cut all those into manufacturing. While we don't have a timeline, as Terry said, we've got about five enhancements and different indications to launch over the next 12-18 months.
That'll keep us very busy. Gen 5 will come after that.
Definitely. Actually, one of my questions was to help me understand the benefit of this shared platform. Really it's almost the baby step for your Gen 5 in terms of getting to the mobile platform eventually. Is that how we should think about it?
Absolutely. From you know, from an operations and an internal perspective, yes. I can tell you from a customer perspective, it's much more than that. I was discussing it with a physician this morning, and the physician's reaction was a huge wow. I mean, kids are gonna be able to take this to school and plug it in the back of the classroom, for example, and data can go to the parent all day long, and they can watch them. It can also go to the school nurse. This will be a big wow for our patients. For the traveling spouse who's on the road all the time who has Type 1 diabetes, the other spouse can watch the data at home and make sure nothing happens. The sense of comfort there is something that's gonna be a big deal.
In our minds, as I walk around here and say all the time, that's gonna sell more sensors.
Yeah. I don't know if I'd want my wife to see my glucose levels when I traveled.
You can take the receiver out of the cradle, Bill. There it gives away.
Lastly, it's just, you know, does J&J's issues with the OneTouch Verio have any impact on the SAP device? Because if they, you know, I think they had a recall, I'm not exactly sure, but I think they've had challenges on the OneTouch. If they've got something going on in the FDA, can they get a PMA approved?
It's different divisions. That's the Verio is with the LifeScan division. Animas is actually a separate operating company. They operate somewhat together as a diabetes franchise, but they're two distinct companies. The warning letter on Verio went to LifeScan, not to Animas.
The government FDA doesn't look at J&J as one big company. They break them up into their operating companies.
No, no. It's operating company at the operating company level.
Okay. Thank you very much.
Our next question comes from Danielle Antalffy from Leerink Swann. Please go ahead.
Hi, guys. Can you hear me okay?
Sure. Yes, we can.
Okay, great. Thanks so much for taking the question. Kevin, you mentioned the split between hardware and sensor. I was wondering if you could give us any color on the split within the sensor revenue of Seven Plus versus G4.
No. Other than the G4 was substantially more.
Well, that's helpful. Then my second question is, you know, if you speak to your competitor, Medtronic, it claims to be making progress with FDA on the Enlite sensor. I was just hoping to get a sense from you guys of what you're hearing in the marketplace in anticipation of the Enlite sensor with the Low Glucose Suspend device. Because the way they talk about it, they actually say they think it's negatively impacting their diabetes business now because patients are waiting for the device to be approved. So just if you have any sense of at least what you guys are seeing in the marketplace on that front, because that would imply, obviously, that there's a bulge of patients waiting to go on this device. Just wondering if you had any comment there.
Well, I look at what's going on in Europe where the device is available, and certainly Animas and Johnson & Johnson have made public comments that they're growing 30%-50% in markets in Europe where the Vibe has launched in direct head-to-head competition with the Veo system. They don't seem to be too worried about it. I think here in the U.S., when we talk to the folks, both J&J and certainly Tandem, they seem to be cannibalizing the installed base. I'm not sure patients, quote, are waiting to go to this other system. The challenge is, and here's part of our, I'll call it a conundrum for a lack of a better term.
Last year, our medical director, David Price, got up and spoke and talked about all the ways you can manipulate data from a glucose sensing standpoint, and that we never do that. We always only do prospective analysis. Medtronic got up at that same meeting and said that the Enlite was about 13% MARD. We've tested the heck out of it. We couldn't get it to perform that way. Dr. Russell and Dr. Damiano presented results that said they couldn't get it to perform that way either. It was closer to 18% than 13%. Fast-forward to ATTD earlier this year. Medtronic gets up and says, "Well, the Enlite is on a prospective basis, closer to 18%," which is consistent with where our experience with it is and actually out in the field experience.
Now, I think from an FDA standpoint, you've got a product that's pending before the FDA. They've seen our data, which is part of our strategy, and now they're looking at something that can have a MARD for a sensor in order to shut off insulin delivery of somewhere close to 18%. It's a conundrum. It's a conundrum for the agency to say, "What are we gonna do here?" Now, most recently, you're hearing from Medtronic talk about Enlite 2 and other things predictive. I don't know. I don't think the market reaction or that there's this huge pent-up demand. I know they're suffering, but I don't think it's related to waiting for the Veo system.
Right. Okay. Thank you so much. That's helpful.
Our next question comes from Robert Marcus from Leerink Swann. Please go ahead.
Thank you. My question's been answered.
Our next question comes from Greg Simpson from Wunderlich Securities. Please go ahead.
Yeah, thanks. Good afternoon, guys. Let me add my congratulations on a great quarter. Terry, you kind of answered it in response to Bill's question. I got two questions. My first one you kinda answered, but I was wondering, with the new algorithm for the G4, how does that affect kind of your pacing on the pipeline and kind of the progression to the G5? I know they're different animals, but does it affect your thinking? In other words, do you work-
Yes, that's.
Yeah, I'm sorry. Do you do more on the G5 and may come out with a G5 and a half? You know, kinda like you did on G4 because of the FDA process.
You know, this is Kevin. I'll take that. One of the things we've been, we believe, successful in is kinda segmenting some of the improvements in our product and not linking everything together. One of the issues we had with Gen 4 and launching it, as you just said, it became Gen 4 point five because we took the membranes from the Gen 5 system and moved them back when it took so long to file. We're gonna do our improvements in smaller increments and file them and not necessarily interlink them. We'll file the algorithm, and it certainly will run with Gen 4, and it may, in fact, be the algorithm we launch Gen 5 with.
Don't have the answer to that yet, but we can file the algorithm, and then we can launch it any time that we're ready, and that's how we look at it, and that's how we're gonna treat this. All these things, we're trying not to link them all together. We wanna do them in the order that best meets our business needs. It isn't tied with that. There could be a Gen 5.5 algorithm, but in all reality, that will depend upon the timing of a Gen 6 sensor, and if a Gen 6 sensor comes, that algorithm would be completely different anyway. We don't wanna do things that aren't gonna lead to increased profitability.
Okay.
This algorithm, we believe, will lead to increased profitability 'cause again makes the system more accurate and more reliable for our customers, so.
Okay. A pipeline embarrassment of riches. That's a nice problem to have. Kevin, you mentioned profitability, so I feel compelled to ask this question 'cause we've seen a growing number of companies raising money. This question has been answered or asked of you guys on past conference calls. Do you feel, and you're making obviously from a non-cash standpoint, very good progress towards profitability. Can you just talk about that in general and just kinda how you feel comfortable with the balance sheet and where you feel like you sit right now?
You know, it's funny. If somebody were to ask me my favorite number that I recited in all these numbers, it would be six. That would be the $6 million that dropped to the bottom line on $9.2 million in increased sales. Our operating income cash loss was only $3.7 million this quarter compared to a number closer to $10 million a year ago. Our working capital progressed exactly the way we wanted it to. We have debt capacity of close to $30 million that we can take down later this year if we needed cash. We've made a commitment internally to ourselves, to our management team and to our investors that we're not gonna go raise more equity money. We're gonna turn this thing where it needs to be.
With growth like this, we believe we can do it. That's our plan today.
Awesome. All right. Thanks very much.
We have no further questions at this time.
Okay, I'd like to wrap it up, and I've got a few, you know, 35,000-foot level kinda comments. In March of this year, the American Diabetes Association released new data which estimates the total cost of diagnosed diabetes in the United States has risen to $245 billion per year in 2012 from $174 billion per year in 2007. This is a 41% increase over just a 5-year period. Today, nearly 26 million adults and children are living with the disease in the United States, and an additional 79 million are estimated to have prediabetes. Direct medical costs totaled $176 billion last year for hospital and emergency care, office visits, and medications.
Indirect medical costs, including absenteeism, reduced productivity, unemployment caused by diabetes-related disability, and lost productivity due to early mortality totaled $69 billion last year. We have gone from 12.1 million people diagnosed with diabetes in the U.S. in 2002 to 17.5 in 2007 to nearly 26 million people with diabetes in the United States in 2012. The high cost of complications has increased the economic burden over $70 billion annually in just the last five years. Yet we know that CGM can improve outcomes and delay or perhaps even prevent the onset of many of these complications. There's absolutely no wonder why I'm so excited about the current and the future prospects of Dexcom. Thank you.